Bharati Shipyard - Buy report with target price

The brokerage firm, Prabhudas Lilladher has retained buy on Bharati based on valuations of 1.9 times FY09 and 1.2 times FY10

CMP: 69
Target Price: 113
Prabhudas Lilladher expects Bharati Shipyard Ltd to witness a certain overhang from its subsidiaries lending Rs 200-250 crore to Great Offshore’s promoters against a pledge of 14 per cent of Great Offshore’s equity.

The rate of interest is said to be between 12-14 per cent, but the deal remains ambiguous on number of fronts. Besides, the sudden emergence of this may also dent sentiments for a period of time.

The deal was struck to bail out Great Offshore’s promoters who had borrowings from financial institutions against the company’s stock who threatened to sell on account of the stock price correction. This led the promoters loosing control as their stake stands at 15.5 per cent.

Although there will be no profit and loss implication on the company as the interest rate on the loaned amount is at commercial terms, Bharati Shipyard will have to leverage further in order to fund its capital expenditure. After accounting for further leverage, the company’s debt: equity ratio would stand at 1:2.

The largest risk lies in the fact that the collateral is far lower than the loaned amount. In case, Great Offshore’s promoters are unable to repay the loan or find financial investors to buy their stake, Bharati would effectively be acquiring the stake at Rs 360-450 per share.

Great Offshore is the largest customer for Bharati Shipyard, which is currently building a jack-up rig for Great Offshore as well as an MSV worth Rs 260 crore. On account of this deal, Prabhudas expects Bharati to be a beneficiary of any potential business from Great Offshore which could be in terms of new orders or repair work.

The brokerage has retained buy on Bharati for a target price at Rs 113, based on valuations of 1.9 times FY09 and 1.2 times FY10 (PER without subsidy).